China's bailouts darken horizon for solar panel sector

HONG KONG, March 27 | By Charlie Zhu

HONG KONG, March 27 (Reuters) - China's rush to bail out
Suntech Power Holdings and other solar panel makers is
condemning its solar sector to a worsening glut, as demand
remains stubbornly stagnant, both at home and abroad.

As prices crumble in the once high-flying solar panel
industry, Chinese authorities fear that letting uneconomic
manufacturers collapse will destroy tens of thousands of jobs
and increase the potential for unrest.

On the other hand, throwing these firms a lifeline is a
drain on public finances and just adds to over-supply. Against
global demand for 30-35 gigawatts (GW) of solar power this year,
supply is 50-60 GW, most of which is in China, according to some
industry estimates.

While local authorities in China continue to bail out solar
panel makers to preserve social stability, governments suffering
from strained finances are withdrawing the incentives that could
spark increased demand.

"None of us is doing well. We are all locked in the prison,"
said Yang, whose firm is developing a solar farm in Bulgaria and
is seeking financing to launch more overseas projects as one way
to escape the glut. However, even China's state banks are wary
of lending to the sector - solar panel prices have fallen about
66 percent in the last two years.

Both at home and abroad, the incentives offered by
governments wanting to shift to cleaner energy are drying up.
The euro zone debt crisis has led to countries like Germany
slashing subsidies for renewable power.

The United States has slapped anti-dumping duties on Chinese
solar panels and the European Union, China's biggest market for
the product, could be on the verge of following suit.

Some Chinese panel makers have been shifting focus to the
home market, hoping Beijing's moves to stimulate domestic solar
consumption would come to the rescue.

But the measures are unlikely to have any major impact due
to the sheer size of China's solar panel making capacity, a lack
of funding for solar subsidies, China's geographical energy
imbalance and the absence of infrastructure required to harness
intermittent renewable energy.

CAPACITY MUST SHRINK

Beijing aims to have a total 35 GW of solar energy by 2015,
from both utility-scale solar farms and distributed generation
facilities like solar panels installed on the rooftops of villas
and factory buildings. By 2020, it wants to boost generation to
100 GW, according to Chinese state utility giant State Grid.

In theory, that should mop up much of the idle capacity of
the solar panel manufacturers, but does not look feasible in
practice.

"Unless capacity shrinks, there won't be any material
recovery for the Chinese solar panel industry until at least
five years from now," said Jason Cai, chief analyst at
Shanghai-based consultancy Solarzoom.

Chinese wind and solar producers have been suffering from
delays in subsidy payment, hurting investment interest. And
industry sources say there are rumours of China's finance
ministry cutting subsidies for solar farms in western China,
where they are more profitable because of abundant sunshine.

State Grid has been holding back from purchases of
electricity from wind and solar farms due in part to concerns
that the intermittent source of power would disrupt its
networks. It has also been struggling to transmit power from
renewable energy generating centres in the northwest, north and
northeast to population hubs in the south and east due to a lack
of a comprehensive high-voltage and smart grid.

More recently, Beijing initiated an ambitious programme to
promote distributed generation. State Grid last month said it
would connect all distributed renewable sources to the grid for
free.

But it purchases the power at prices it pays for cheaper
coal-generated electricity and generators have to apply to
Beijing by themselves for subsidies -- an onerous process.

Without subsidies, it will take distributed solar generators
20-25 years - more than the life time of solar panels - to
recover investment.

"The problem (about solar power) is the technology is not
cost-competitive enough," said He Guoqing, deputy head of solar
research at State Grid. "It can't survive without subsidies but
any subsidies won't stay forever."

BAILOUTS

Still, the bailouts continue.

Suntech Power - China's largest solar panel maker - said
last week its biggest subsidiary Wuxi Suntech was bankrupt but
would undergo a government-led restructuring.

The Wuxi government's plan is to restructure its debt while
continuing production, keeping workers in their jobs and
avoiding potential unrest. Suntech's main factory is in the city
of Wuxi, where it employs about 10,000 workers.

Some Beijing officials have argued it makes sense to let a
few manufacturers go bankrupt in light of the oversupply of
panels. But local governments are concerned that allowing the
companies to fail would risk stoking social unrest.

At stake are the jobs provided by the companies, but also
the billions of dollars in debt run up by them in the boom
years, mostly owed to local creditors but also including $541
million worth of dollar-denominated bonds of Suntech.

"In China the intuitive response of governments is to see
how such situations (factory closures) can be avoided and so
they try to resist or postpone such lay-offs," said Louis Kuijs,
chief China economist at RBS.

"It will be a big issue going forward and it would be
incumbent on the government to signal what process Beijing is
comfortable with in the event of such bankruptcies."
(Additional reporting by Umesh Desai; Editing by Raju
Gopalakrishnan)